~ Investment Strategy

Soros on Europe

I am only in the office for a day and a half this week — breaking out the sandals and hummus and heading to the Hay Festival. In lieu of any posts, here is a brief note I wrote to my colleagues this morning.

His favoured framework of “reflexivity” could be left out — it is not a good enough model of the European situation to make any predictions. His brief history of the political development of the EU is right but I think he is wrong about the process having turned around (his model giving no guidance as to how to judge when the reflexive process has turned around). It is true that the present generation of German leaders is not as instinctively and automatically in favour of European integration as the previous one, but a) it is being asked to go further than the previous one, which may be much of the explanation and b) the idea that “more Europe” is the solution to every problem is as much a feature of the current political landscape as it has been of that of the past several decades and has already led to the creation of permanent sovereign-bailout institutions.

The conclusion is not as has been reported:

“But the likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for Germany. It would leave Germany with large unenforceable claims against the periphery countries. The Bundesbank alone will have over a trillion euros of claims arising out of Target2 by the end of this year, in addition to all the intergovernmental obligations. And a return to the Deutschemark would likely price Germany out of its export markets – not to mention the political consequences. So Germany is likely to do what is necessary to preserve the euro – but nothing more. That would result in a eurozone dominated by Germany in which the divergence between the creditor and debtor countries would continue to widen and the periphery would turn into permanently depressed areas in need of constant transfer of payments. That would turn the European Union into something very different from what it was when it was a “fantastic object” that fired peoples imagination. It would be a German empire with the periphery as the hinterland.”

I agree. Disaster could happen, but I think that the more likely outcome is permanent depression in the periphery with permanent fiscal transfers (as in the US: http://nyti.ms/NgMsew).